Peter Schiff: The Fed Is Going to Let the Inflation Genie Out of the Bottle

Friday was an active day in the markets. The S&P 500, the Russell 2000 and the Nasdaq all hit record highs. The Dow Jones didn’t quite crack into record territory, but it was up over 100 points. Meanwhile, the dollar fell and gold was up more than $20.

In his latest podcast, Peter Schiff said he thinks the dovish speech by Federal Reserve chair Jerome Powell at Jackson Hole drove all of this. And it could have longer-term ramifications.

As Peter noted, the strength of the dollar and the weakness in gold have primarily been driven by expectations of aggressive central bank monetary tightening.

If what Jerome Powell said today causes traders to second-guess those assumptions and maybe dial back their expectations for rate hikes, maybe not necessarily the two rate hikes that everybody believes that are coming in the balance of 2018, but potentially they idea there may be no rate hikes at all coming in 2019 and that 2018 may be the end of it, and in fact, maybe we won’t even get the December rate hike. I think to the extent that traders start to reprice the odds of future rate hikes, this could be a big move in the dollar, a big move in gold.”

Of course, the dollar weakness after the Jackson Hole speech could end up being just a one-day event. Traders may not read into Powell’s comments what Peter thinks he actually meant.

So, what exactly did Powell say? And what did he mean?

Basically, what Powell said was that number one, he sees no danger of the US economy overheating and that he sees a low likelihood that inflation is going to move beyond the Fed’s 2% goal.”

Of course, as Peter noted, year-over-year CPI is already close to 3%. Regardless, Powell took a very cautionary tone when it comes to raising interest rates. He praised Alan Greenspan for not moving too fast back in his day, saying we should wait until we see the whites of inflation’s eyes.

Meanwhile, here we are — rates are only at 2% and Jerome Powell is afraid the mistake the Fed might make is raising interest rates too much when, if anything, the mistake is that they haven’t raised them enough and that they lowered them too much. In fact, that’s what Powell should have been criticizing Greenspan for — lowering rates and keeping them too low for too long.”

But Powell seems to be more afraid of fighting an inflation boogeyman that doesn’t exist. So, he’s saying he’s not going to do that. He is not going to err on being preemptive when it comes to stopping inflation. But if, for some unexpected reason, inflation spikes up, well above what the Fed believes, well, then they will do whatever is necessary to rein it back in.

Peter said when you boil it all down, Powell’s message is pretty easy to discern.

What Powell is saying is, ‘We are not going to do anything to make sure that the inflation genie stays in the bottle, but if the inflation genie actually escapes the bottle, and we don’t think that she’s going to; we think the genie is happy hanging out in the bottle. But if for some reason she gets free, well then, we’re going to do whatever it takes to get her back in.’”

As Peter said, good luck with that because it’s impossible. Once the inflation genie is out of the bottle, it’s very hard to get her back in there, especially given the vulnerability of the US economy. In order to seal up that bottle, it would take massive rate hikes. And as we’ve said over and over, an economy built on a pile of debt can’t take significantly higher interest rates.

Peter said he thinks stagflation is on the horizon.

I think by the time we have this high inflation, we’re also going to have recession. Now, is the Fed going to do whatever it takes to put the inflation genie back into the bottle even if it means exacerbating a recession that is already underway? Because we can certainly have inflation and recession at the same time. I mean, we’ve had it before and I think we’re going to have it again. But of course, given the amount of debt that we have, if the Fed really jacked interest rates up to seven, eight, nine percent — whatever it took to rein in that inflation, not only would it cause another financial crisis, but it would cause the US government to either have to dramatically slash spending on things like Social Security and Medicare, dramatically increase taxes, even during a recession, or default in its bonds. So, doing whatever it takes means basically economic Armageddon, so I don’t believe that for a minute.”

When you boil it all down, it seems like Powell is saying we’re near the end of the tightening cycle and no matter what inflation does, the Fed isn’t going to do anything about it. The Fed will remain accommodative because it’s afraid of raising rates too much.

So, this is exactly what you would want to hear if you were buying gold and exactly what you would not want to hear if you were short gold.”

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